Answers

Fundamentals Level – Skills Module, Paper F6 (HUN) Taxation (Hungary)

June 2016 Answers and Marking Scheme

Section B 1

Marks

Advice Zrt (a)

Value added tax (VAT) liability for July 2015 HUF ’000 VAT – – –

payable Sales revenue from VATable activities (90 million x 27%) Disposal of tangible non-current asset (1 million x 27%) German legal services (€5,200 x 310 x 27%)

VAT – – –

deductible Marketing and advertising services German legal services (€5,200 x 310 x 27%) Allocated and apportioned input VAT (working)

HUF ’000

24,300 270 435 –––––––

½ ½ 1 25,005

0 435 10,544 –––––––

½ 1 W 10,979 ––––––– 14,026 –––––––

VAT payable

Working: Allocation and apportionment of input VAT relating to both VATable and VAT exempt activities sales which entitle the entity to deduct VAT (excluding sales of non-current assets) Deduction ratio = –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– total sales excluding sales of non-current assets For the six-month period ended 30 June 2015: 600 million ––––––––––––––––––––––– = 0·6593, i.e. 66% 600 million + 310 million

1½

Deductible input VAT for the first six months of 2015: HUF 160 million x 66% = HUF 105,600,000.

½

For the seven-month period ended 31 July 2015: 600 million + 90 million –––––––––––––––––––––––––––––––––––––––––––––– = 0·6764, i.e. 68% 600 million + 310 million + 90 million + 20 million Deductible input VAT for the first seven months of 2015: HUF [160 million + (40 million x 27%)] x 68% = HUF 116,144,000. VAT deductible in July 2015: HUF 116,144,000 – HUF 105,600,000 = HUF 10,544,000.

(b)

1

1 ½ ––– 8 –––

Conditions for the ‘tax exempt business’ status A company or a private entrepreneur may opt for overall VAT exemption (alanyi adómentesség), i.e. it will not be liable to charge VAT on sales and will not be able to deduct VAT on purchases, if it meets the following criteria: – – –

2

the taxpayer has its seat (or permanent establishment) in Hungary, and its actual sales revenue in the preceding tax year did not exceed HUF 6 million, and its sales revenue for the current tax year is expected not to exceed HUF 6 million.

SAF Kft (a)

Situations in which cars are not subject to company car tax A car is not subject to company car tax if it is a car which: – – –

is owned by a private individual and used exclusively for private purposes, i.e. nobody deducts expenses in relation to the car; is used by police, ambulance, etc (megkülönbözteto ˝ jelzést használó jármu ˝); was acquired by an organisation for exclusively re-sale purpose, and the organisation’s main activity is trading cars;

17

1 ½ ½ ––– 2 ––– 10 –––

Marks – – –

is used by a church and the car serves the ecclesiastic activities of the church; The employer reimburses the cost of the employee incurred in relation to using the car for commuting to work on a daily basis, irrespective of the amount of the reimbursement; The private individual receives a reimbursement of his/her car expenses based on travelling order (kikuldetesi rendelveny), irrespective of the amount of reimbursement. 3 –––

Three items only required, 1 mark each, maximum (b)

Company car tax payable for the year 2015 Car – – – – Car – – – – –

(c)

1 Date of obligation starts: 1 March 2015 Company car tax payable: HUF 33,000 per month Payment on 20 April: HUF 33,000 Payments on 20 July 2015, on 20 October 2015 and on 20 January 2016: HUF 99,000 (3 months x HUF 33,000) 2 Date of obligation starts: 1 June 2015 Date obligation ends: 31 December 2015 Company car tax payable: HUF 22,000 per month Payment on 20 July 2015: HUF 22,000 Payments on 20 October 2015 and on 20 January 2016: HUF 66,000 (3 months x HUF 22,000)

1 ½ ½ 1 ½ 1 ½ 1 ––– 6 –––

Car capacity tax Car capacity tax is deductible from the company car tax if: – –

3

(a)

the tax obligation of the taxpayer existed for both company car tax and car capacity tax, and the taxpayer paid the company car tax within the legal deadline.

Lifa Bt – Net distributable dividends under EVA Sales revenue including value added tax (VAT) (20 million x 1·27) EVA (25,400,000 x 37%) Purchases including VAT (7 million x 1·27) Gross salary costs Contributions on salary (2·5 million x (27% + 1·5%)) Local municipality tax (25,400,000 x 2% x 50%) Net distributable dividends

(b)

½ ½ ––– 1 ––– 10 –––

HUF 25,400,000 (9,398,000) (8,890,000) (2,500,000) (712,500) (254,000) ––––––––––– 3,645,500 –––––––––––

1 1 1 ½ 1 1½ ––– 6 –––

Ms Hadas – Personal income tax on foreign dividend Net dividend received Gross dividend received ($6,000/(1 – 0·25)) Gross dividend converted to HUF ($8,000 x 280) Personal income tax payable in Hungary (2,240,000 x 16%)

USD 6,000 8,000

½

HUF 2,240,000 358,400

½ 1

560,000 112,000

½ 1

Tax paid abroad may reduce the Hungarian tax payable but at least 5% tax is payable in Hungary. – –

tax paid abroad (($8,000 – $6,000) x 280) 5% minimum tax payable (2,240,000 x 5%)

So tax payable in Hungary is HUF 112,000.

½ ––– 4 ––– 10 –––

18

Marks 4

(a)

Rudas Kft – Corporate income tax liability for the year 2015 HUF ’000 Tax – – –

base reducing item (direct R&D expenses) Services purchased from foreign taxpayers Material cost Labour cost

Total value of direct R&D expenses Maximum potential R&D incentive (3 x 55 million) Tax base reducing item limited to Non-allowable expenses for the purposes of the R&D incentive – R& D services purchased from Hungarian taxpayers R&D services purchased from private entrepreneurs – Profit before tax Tax base reduction (as above) Corporate tax base Corporate tax payable at 10%

(b)

25,000 10,000 20,000 –––––––– 55,000 –––––––– 165,000 50,000

½ ½ ½

30,000 15,000 300,000 (50,000) –––––––– 250,000 –––––––– 25,000

½ ½

1 1

½ ––– 5 –––

Sadur Kft (i)

Corporate income tax base for the year 2015 Profit before tax Tax base increasing item: – Accounting depreciation (200 million/4 years) Tax base reducing items: – Tax depreciation – Development reserve (working) Corporate tax base

HUF ’000 400,000 50,000

½

NIL (200,000) –––––––– 250,000 ––––––––

½ W

250,000 200,000 500,000 ––––––––

½ ½ ½

Working: Development reserve is the lowest of: – – –

Actual development reserve created 50% of profit before tax (50% x 400 million) HUF 500 million

So the tax base reducing item is HUF 200 million.

(ii)

½ ––– 3 –––

Deadline for the use of the development reserve created in 2015 The development reserve created in 2015 must be used to acquire new non-current assets in the four tax years following the year of creation, i.e. by the end of 2019. If the whole of the development reserve is not used within the four tax years, the taxpayer must repay the corporation tax applicable to the unused part of the reserve, plus late payment interest.

19

1 1 ––– 2 ––– 10 –––

Marks 5

Della Zrt (a)

Fiscal fines HUF 8,712 14,795

Self-revision surcharge: (4 million x (2 x 1·5%) x 53/365 x 50%) Default penalty: (3 million x (2 x 1·5%) x 60/365)

HUF 900,000,000 (8,712) (14,795) (8,000,000) –––––––––––– 891,976,493 ––––––––––––

Profit before tax before adjustments Self-revision surcharge (as above) Default penalty (as above) Tax penalty Revised profit before tax

(b)

1½ 1

½ ½ ½ ––– 4 –––

Corporate income tax liability for the year 2015 HUF ’000 Profit before tax (from part (a)) Increasing items: Tax penalty Default penalty (from part (a)) Self-revision surcharge Provision created Accounting depreciation and accounting carrying value of the asset sold Foreign currency revaluation losses (unrealised)

(working)

HUF ’000 891,976

8,000 15 0 40,000

½ ½ ½ ½

6,000 12,000 –––––––

W ½ 66,015

Decreasing items: Provision reversed Tax depreciation and tax written down value of asset sold Dividend received Foreign currency revaluation gains (unrealised)

(working)

10,000

½

3,600 20,000 24,000 –––––––

W ½ ½ (57,600) –––––––– 900,391 ––––––––

Corporate tax base Corporate income tax at 10% on the tax base up to HUF 500 million Tax on the remaining amount (900,391 – 500,000) x 19% Final corporate tax liability

50,000 76,074 –––––––– 126,074 ––––––––

½ ½

Workings: Working 1: Asset sold HUF ’000 Accumulated tax depreciation as at 1 January 2015: 9 million x 20% x 3 years Tax depreciation in 2015: 9 million x 20% x 9/12

Tax written down value of the asset at sale (9 million – 6,750,000) Total of tax base reducing items in 2015 (2,250 + 1,350) Accumulated accounting depreciation as at 1 January 2015: (9 million – 1 million)/8 years x 3 years Accounting depreciation in 2015 (9 million – 1 million)/8 x 9/12

Accounting carrying value of the asset at sale (9 million – 3,750,000) Total of tax base increasing items in 2015 (5,250 + 750)

20

5,400 1,350 –––––– 6,750 –––––– 2,250

½ ½

½

3,600 3,000 750 –––––– 3,750 –––––– 5,250 6,000

½ ½

½ ––– 8 –––

Marks (c)

Controlled foreign corporation A company is considered to be a controlled foreign corporation (CFC) if: –

–

The company is a foreign tax resident entity and a domestic private individual holds (directly or indirectly) a minimum of 10% of the shares of the foreign tax resident entity for more than half of the days of the tax year; or

1

The majority of the revenue of the foreign tax resident entity comes from Hungarian sources and any of the following conditions is met:

½

o o o

6

the effective corporate tax rate paid by the entity in the current tax year (tax payable/tax base) is less than 10%; or the entity does not pay corporate tax since its corporate income tax base is zero or negative even if its accounting profit before tax is positive; or the entity’s corporate tax base and its accounting profit before tax are negative and the corporate tax rate (or the tax equivalent to it) in the foreign jurisdiction is less than 10%.

½ ½ ½ ––– 3 ––– 15 –––

Mr Vass (a)

Income in the form of securities Taxable income arises where a private individual acquires securities below their market price. The amount of the taxable income is equal to the customary market price of the securities at the time of acquisition less the actual purchase price and any expenses related to the acquisition of the securities.

2

The classification of the income and thus the tax payable by the buyer (private individual) and the seller is determined based on the legal relationship between the buyer and the seller.

1½

No taxable income arises if: – – – – – –

the securities were acquired in a transaction available to anyone under the same conditions; the securities were acquired as a result of a transformation (the private individual is an owner in both the predecessor and successor company); the shares were acquired in a transaction in which convertible bonds were converted into ordinary shares; the securities were acquired in form of ‘employee shares’ (dolgozói részvény) issued by the employer from the reserves of the company; the shares were acquired by using compensation notes (kárpótlási jegy) to purchase shares in a public company; shares were issued as a part of capitalisation of reserves.

½ ½ ½

––– 5 –––

Tutorial note: Only three exemptions were required. (b)

Personal income tax (PIT) liability for the year 2015 HUF Consolidated tax base Non-independent activities Salary (500,000 x 12) Income in form of securities (100 x (15,000 – 10,000)) Total consolidated tax base Family allowance (3 x 206,250 x 12 months) Total tax base Tax on consolidated tax base at 16% Tax on income taxed separately Income from long-term deposits (1,500,000 x 10%) Dividend income (1,000,000 x 16%) Regulated market transaction (5,000,000 – 2,000,000) x 16% Total PIT liability

21

6,000,000 500,000 –––––––––– 6,500,000 (7,425,000) –––––––––– 0 0 150,000 160,000 480,000 –––––––––– 790,000 ––––––––––

½ 1 1 ½ 1 ½ 1½ ––– 6 –––

Marks (c)

Contributions to the State Health Fund and the State Pension Fund for the year 2015 HUF Contributions to the State Health Fund – Base for contribution payment – Calculated contribution (6,500,000 x 7%) – Unused family allowance from part (b) (7,425,000 – 6,500,000) – 16% of unused family allowance (925,000 x 16%) Health care contribution payable (455,000 – 148,000) –

6,500,000 455,000 925,000 148,000 307,000

½ ½ 1 ½ ½

Contributions to the State Pension Fund Base for contribution payment – – Contribution (6,500,000 x 10%)

6,500,000 650,000

½ ½ ––– 4 ––– 15 –––

22